COVID-19: Confronting Uncertainty Through and Beyond the Crisis The

COVID-19: Confronting uncertainty through and beyond the crisis The power of scenario-thinking to enhance decision-making April, 2020 COVID-19: Confronting uncertainty through and beyond the crisis

The changing calculus of uncertainty

For a generation of business leaders, we have been Questions abound, for which – at the time of writing – there operating in and living through what we believed were are few, if any, answers. uncertain times. Continual upheavals, disruptions and global shifts like digitization, technology transformation, What, for example, will be the global health consequences changing geopolitics, evolving business models, and a of the pandemic? What will be the near-, mid-, and longer- changing consensus on globalization and trade have term consequences of our responses to it, and to the for decades challenged the very notion of executive various measures that countries are taking to “flatten the decision-making. We have been talking about a volatile, curve”? How might the crisis change the way we live and uncertain, complex, ambiguous (VUCA1) environment for work in the future? How will the crisis influence relations most of our lives in business; two futurists even recently within and between major countries? How will a country’s averred that acceleration itself was accelerating.2 role in – and dependence upon – global supply chains and trade change, based on its responses to the crisis? What The COVID-19 pandemic, however, is changing–or has will be its impact on the roles of the private and public already changed–our collective calculus of uncertainty The sector? How will these changes be amplified by technological reality is, there exists no reference case for the COVID-19 disruption? What will be the nature of the recovery and crisis in living memory. Yes, there have been flu pandemics. rebound? And for those looking beyond the crisis, what Yes, there was Black Monday and the 2008 financial crisis. opportunities may be captured by the fortunate or the bold? And yes, there have been localized threats and disasters with regional or national implications: Chernobyl, the Iraqi invasion of Kuwait, 9/11, Hurricane Katrina. But from our vantage point, the COVID-19 pandemic is more global in scope, more profoundly impactful and far-reaching, and more complex than any other crisis that today’s decision-makers have experienced or contemplated.

No country or sector, and no company, executive team, or individual leader will be immune from COVID-19’s impact and consequences. No strategy will survive fully intact. Moreover, it’s likely that the choices organizations face will only get tougher and more complex as we collectively anticipate the post COVID-19 environment.

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Typical responses to uncertainty

In uncertain times, executives aren’t spared the responsibility the past experience3. Another is to be over-confident about of critical decision-making. If anything the time-frame for the outlook (whether good or bad) and the inherent veracity making choices shortens, even as the contextual uncertainty of choices. makes decision-making commensurately harder. Recent business history provides many instances of giants In our experience, though, many executives and boards tend toppled by misunderstandings of uncertainty – whether toward one of two types of response to uncertainty. The first they be financial players taken by surprise during the last is to recognize its existence, depth, and complexity but to financial crisis, phone manufacturers failing to anticipate the become paralyzed by it, which often manifests as slow, timid smartphone revolution and, later, the iPhone’s potential to or erratic decision-making. rewrite the industry, or computer manufacturers that missed the PC market’s bullet train in the 1980s. Misinformed The alternative is brashness in the face of uncertainty, as bullishness and complacency caused these organizations though to wish away complexity. One potential outcome either to overlook a firm-diminishing downside or to is the pre-disposition to arrive at fast, superficial completely miss a significant upside opportunity. assessments and simple answers, often mis-analogizing

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Embracing uncertainty

So, what is the antidote to indecision or, conversely, over-confidence? According to common business wisdom, the best leaders embrace uncertainty. But what does that actually mean?

Embracing uncertainty means knowing what you know, knowing what you don’t or can’t know, and knowing the difference.4

Acting in the face of uncertainty has been a defining theme of modern business, even within a context of macroeconomic stability and continuity. But it’s becoming harder to shock today’s executives; potential responses to what were considered black swan events even a generation ago are today built into most strategic scenarios. By any standard, however, the COVID-19 pandemic qualifies as a true outlier.

Embracing this fundamental reframing – widely described as the “next normal” – means confronting uncertainty head-on, and building it into your decision-making. Our perspectives on how to do so entail the following:

Consider uncertainty under different competitive dynamics. Broader structural shifts need to be time horizons. The near-term uncertainties of considered, along with regulatory changes that might apply COVID-19 and its consequences are fundamentally to industries and ecosystems relevant to your company. different from the pandemic’s mid- and longer-tem uncertainties and their consequences. Depending on Use uncertainties to envision where we live in the world and our relevant industries, multiple different futures. Embracing right now we’re asking either how long this will last or what uncertainty means acknowledging that we the nature of the rebound might be. At the same time, can’t know for certain what the future holds, and being we need to consider the contours of the recovery. Which comfortable with that notion. The key is to imagine and sectors will ascend or, conversely, recede? How might consider divergent futures, whether short term or longer our collective experience with the pandemic reshape term. The most proven and powerful way to do this is to use business, society, and politics? What will the “next normal” scenarios. As described in a Harvard Business School note look like? Will new habits that are flourishing or required on the topic, “[Scenarios] are plausible alternative hypotheses under COVID-19, such as online shopping, working from about how the world might unfold, specifically designed to home, and physical separation, persist or recede? highlight risks and opportunities facing the organization. Effective scenarios challenge … thinking … by instilling a deeper Maintaining sightlines across each of the response, appreciation of the many factors that could shape the future" 6. recovery, and thriving beyond the pandemic phases will For example, had we hypothesized scenarios for the future be critical to long-term success. of mobility before COVID-19 struck, we might have twinned the rapid proliferation of autonomous vehicles with the rise Identify the most salient uncertainties of shared transport solutions to come up with very different for your industry and business. It’s easy to possible futures – for cities, automotive OEMs, and other get caught up in the scope of uncertainty that mobility ecosystem participants. surrounds COVID-19; all at once, it can seem like everything is uncertain. It is imperative, however, that decision-makers In the case of COVID-19, we might instead begin by weighing understand which uncertainties are most critical to their the various health and economic factors that point to business or organization within the time-frames they the potential duration and depth of the economic shock, are considering. In the immediate term, that has meant and potential recovery. Over the longer term, we might understanding and weighing the pandemic’s impact consider the ultimate pattern of disease infection, the level given the uncertain outlooks for health and economics of collaboration within and between countries, the ways and, in turn, their interaction with crucial dimensions like global supply chains might reconfigure, and the possible business continuity, liquidity, assets use, and redeployment. waves of innovation that COVID-19 may trigger. Since all Over the middle to longer term, the focus needs to shift these drivers are deeply uncertain right now, we need the to factors that influence the direction of a company’s disciplined approach of scenario-thinking to help us model strategy, position and resilience5, supply and demand, and and examine how such factors might interact in expected, unexpected, and possibly extreme ways.

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Importantly, scenarios are neither accurate predictions of the future, nor simply sensitivities as to how any one Embracing uncertainty business might incrementally deviate from a base case. At their core, the best scenarios are coherent stories that push leaders to consider very different ways that the means knowing what environment might evolve.

Seek diverse perspectives. If there has been you know, knowing any moment to incorporate diverse perspectives into decision-making, now is it. Not with the intention of slowing down the process, but to make it better. what you don’t or can’t Peter Schwartz, SVP Strategic Planning, Salesforce, and co-founder of Global Business Network, had it right when he opined: “Diversity really does matter. Inviting people into know, and knowing the conversation who make you uncomfortable is a very good idea.”7 Seek perspectives from younger generations, and from those outside your industry, geography, or company. the difference. Identify and draw upon those whom you know disagree with you or have a different opinion. Strive to understand those perspectives and the logic that underpins their views of the future. And collaborate wherever possible with supply chain and ecosystem partners to align on variables and potential outcomes.

Incorporate scenarios into decision-making While scenarios are interesting in themselves, their full power is revealed in their ability to enhance decision-making. One obvious use of scenarios during the COVID-19 crisis is that of stress-testing operations, current strategies, investments, financial strength, and forecasts. How does each of these hold up in different yet plausible futures? Scenarios can also be used to provoke consideration of multiple possibilities. What business models, for example, might emerge over the near and longer term? What will it take to win in different futures? What investments - in capabilities, innovation, M&A, or partnerships – can be made to strengthen one’s future competitive position? Ultimately, scenarios can support the future-proofing of new strategies and options and, as executives weigh possible strategic directions, help in assessing the viability of those options in different possible futures.

Of course, the best discussions around scenarios and their implications explore both risk and opportunity. Yes, there could be a downside… but what might the upside look like, and how might we best prepare to take advantage of it—or create it ourselves?

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Distinguish implications. Considering a range Make choices and monitor. Ultimately, choices must of plausible futures allows leaders to explicitly and will be made: to keep doing certain things and not distinguish between different types of decisions. do others, to make or defer investments, to repurpose Not all choices are equal; creating and exploring scenarios assets, to hold firm, or to invest for the future on a committed can help to weigh and extrapolate the implications of any of or contingent basis. Confronting uncertainty will not make the a portfolio of possible moves: tough decisions any less difficult. It should, however, help to reveal trade-offs and assumptions, and ultimately • Required moves – those choices/actions strengthen conviction. that must be taken to ensure the viability of the organization in the near term Moreover, a clear view of scenarios relevant to a business • No-regrets moves – the choices/actions helps to reveal the indicators that should be monitored, so as that make sense under any scenario to sense the direction of the business environment and either • Big bets – substantive choices/investments confirm the validity of a strategy or set of moves, or prompt made now, with the clear hope or expectation their refinement. Scenarios point toward which indicators need that one or more of the scenarios emerge to be observed in a structured way. Sensing tools can identify (or can be made to emerge) weak signals that appear to be less plausible at first glance, • Contingent moves – moves that are contingent yet may turn into game changers. For this reason, objective on one or more of the scenarios emerging monitoring9 becomes critically important to business leaders in • Satellite moves – smaller moves or investments times of crisis. placed selectively across one or a number of the scenarios, in conjunction with bigger bets. Currently, we are all closely watching indicators of virus spread and containment, and at the health, sentiment, financial, and There is no magic formula for the mix of moves any economic indicators that can point to the nature and pace of organization should make. Clearly, the best strategies are potential recovery. It’s critical that executives also identify the explicit about the nature of choices made8 , and moves to relevant industry and company-specific indicators they need be taken, and typically involve some form of commitment to monitor, so they can identify whether one of the scenarios or substantive bet; after all, you can’t hedge your way to modelled is in fact emerging in expected or unexpected ways. success. Of course, in these times, for many companies, there are required and no-regrets moves, which should be pursued decisively and with maximum confidence. The remainder of the portfolio should be filled out appropriately using available resources and with overall risk tolerance in mind. One rule we like to abide by is that any choice should be pursued aggressively (with full resources and no half-measures) on the basis of a clear and testable logic, so that it can be refined or abandoned if it becomes clear the preconditions for success are unlikely to be met.

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While scenarios are interesting in themselves, their full power is revealed in their ability to enhance decision-making. One obvious use of scenarios during the COVID-19 crisis is that of stress-testing operations, current strategies, investments, financial strength, and forecasts. How does each of these hold up in different yet plausible futures?

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Confronting uncertainty throughout the organization

Confronting uncertainty is critical across and at all levels questions like: How will supply chains evolve? of the organization. What will the talent models of the future look like? What might change about how best to reach and engage For CEOs and their leadership teams, it is paramount consumers? How will consumer expectations evolve? And to weigh enterprise risk and opportunity in relation to which new technologies and business models will emerge both the stress of the situation today and the different as a result of the crisis? ways industries and company positions might be reshaped after COVID-19. Similarly, for CFOs and finance Boards play a pivotal role in helping the organizations professionals, it’s vital to weigh liquidity, balance sheet they govern confront uncertainty. They can do strength, and financial forecasts through a scenario so by ensuring management is alert to future lens, while also using scenarios to provoke thinking possibilities and actively considering different and about M&A and partnership opportunities and other sufficiently divergent scenarios. They should also offensive strategies. In each instance, it is important to ensure management is considering a range of time resist the temptation to simply consider sensitivities to horizons so as to weigh opportunities and risks, an existing or new forecast, as this may lead one to badly make difficult choices with conviction, and review underestimate downside risk, or miss the full upside and refine scenarios and strategies over time. potential.

For functional leaders, scenarios can help anticipate shifts in markets and input factors, providing foresight on

Exceptional circumstances, such as those of COVID-19, require a blend of courage, clarity, and humility. The biggest enemies of good decision-making in times of deep crisis are neither uncertainty nor ambiguity; they are, rather, over-confidence, procrastination, and incomplete or biased data. Intelligent scenario-thinking, when executed well, can mitigate the risk of falling into the trap of over-confidence when anticipating future possibilities. It can reduce or remove hesitation altogether by providing a logical structure to challenge and validate underlying assumptions. And it can mitigate the risk of incomplete and biased data by combining expert intuition with objectively measured qualitative data.

For us, the current pandemic is further encouragement to build scenario-thinking and sensing capabilities more comprehensively into strategy and decision-making. Doing so doesn’t make the uncertainty go away or reduce the doubt, but it should strengthen the courage and conviction of executives to lead their businesses through unprecedented times such as these.

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Footnotes

1. VUCA is an acronym used by the US Army War College in response to the collapse of the USSR in the early 1990s. VUCA- WORLD, https://www.vuca-world.org/, accessed April 2, 2020. 2. Peter H. Diamandis and Steve Kotler, The Future is Faster Than You Think (Simon And Schuster, 2020). 3. Be careful of recognizable “letters” (V, U, W, L) being the only scenarios of the economic shock and recovery. 4. Adapted from Donald Rumsfeld, former United States Secretary of Defense, who is reported to have introduced the concept of known knowns, known unknowns, and unknown unknowns in response to a question at a news briefing on February 12, 2002, about the lack of a direct link between Baghdad and some of the terrorist groups; https://archive. defense.gov/Transcripts/Transcript.aspx?TranscriptID=2636 , accessed April 3, 2020. 5. Roger Martin, former Monitor Director and Dean of the Rotman School of Management, has been developing the notion of resilience and its importance to business strategy. See his articles “The High Price of Efficiency,” Harvard Business Review, January–February 2019, and “The virus shows that making our companies efficient also made our country weak,” Washington Post, March 27, 2020, specific to the perils of America’s focus of efficiency in the lead up to the COVID-19 crisis. https://hbr.org/2019/01/rethinking-efficiency#the-high-price-of-efficiency and https://www.washingtonpost.com/ outlook/2020/03/27/economic-efficiency-resilience-coronavirus/ , accessed March 31, 2020. 6. Donald A. Garvin and Lynne C. Levesque, “A Note on Scenario Planning,” Harvard Business Review, revised July 31, 2006. This article draws heavily on the learning and perspectives of Global Business Network, which was acquired by Monitor (now Monitor Deloitte) in 2000. 7. Peter Schwartz, Learnings from the Long View (GBN Global Business Network, 2011), reflecting upon a career of scenario development. 8. We think of strategy as best expressed as an integrated set of choices – about aspirations, where to play, how to win, and required capabilities and management systems. See A.G. Lafley and R. L. Martin, Playing to Win: How Strategy Really Works (Harvard Business Review Press, first edition 2013). 9. A system that draws upon multiple, quality sources.

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Report authors

Jonathan Goodman Florian Klein Global Managing Partner, Monitor Deloitte Head of the Center for the Long View [email protected] [email protected]

Gavin McTavish Gopi Billa Corporate & Business Unit Strategy Lead, US Market Sensing and Scenario Planning Leader Monitor Deloitte Monitor Deloitte [email protected] [email protected]

Contributors

Jerry O’Dwyer Steven Goldbach Global Strategy, Analytics and M&A Leader Chief Strategy Officer, US [email protected] [email protected]

Andrew Blau Jeremy Drumm US Leader, Signature Issues Asia Pacific Lead Partner - [email protected] Strategy, Analytics and M&A [email protected] David Redhill Global CMO, Bill Marquard Deloitte Consulting Global COVID-19 client response PMO [email protected] Deloitte Consulting [email protected] Jason Dess Global Finance & Performance Leader Jim Kilpatrick [email protected] Global Supply Chain & Network Operations Leader [email protected] COVID-19: Confronting uncertainty through and beyond the crisis

Monitor Deloitte Strategy Leaders

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